Is Moore’s Law Relevant to Cloud Pricing?

The conventional wisdom that says infrastructure-as-a-service (IaaS) always beats out in-housing may not always be true, despite the obvious benefit of so-called cloudsourcing, where you ramp up on-demand cloud service to meet spikes rather than overbuild on-premises for one-offs. But is it fair to use Moore’s Law to argue that the IaaS providers such as Amazon Web Services must keep pricing in lockstep with the on-premise alternative?

InformationWeek Reports’ Art Wittman notes today in a commentary that cloudsourcing is not the best way to evaluate IaaS:

There have been many discussions lately of calculations that assess the incremental cost of using a system versus the cost of it just sitting idle in your data center. That incremental cost plus the baseline cost during the period of real use “feels” like the cost that should be incurred for a cloud service. Even if you paid a premium on top of that cost, you’d still be saving money, right? Well, maybe.

Wittman hammers home his argument with a hammer-as-a-service (HaaS) example:

Say a company decides it will offer hammer as a service to carpenters. The conventional alternative, according to HaaS Inc., is that a carpenter buys a hammer, which is a capital expenditure–usually anywhere from $30 to $100–and then … [it] sits in the toolbox, unused, most of the time. HaaS will provide a hammer just when the carpenter needs it, and it will charge just $0.001 per nail driven. How does the carpenter know if that’s a fair price? The answer is different depending on whether our tradesman is a framer who pounds relatively few nails, or a roofer who tosses down a piece of plywood and proceeds to hammer about 100 nails into it as fast as he can.

So like with hiring the HaaS provider, IT needs a way of measuring IaaS providers’ current usage and estimated usage over time, the argument goes. Fair enough, but if Moore’s Law says the hammer the HaaS service is replacing would be more productive over time, should cloud service providers have to index their cost that that assumed doubling every two years in output?

Wittmann uses Amazon’s EC2 service, which the company charges for based on its elastic compute unit, as the bogeyman in its argument, noting, “Let’s hope our carpenter didn’t sign a five-year contract!” Amazon recently slashed pricing on its S3 cloud storage service and uptimeCloud now offers Amazon Web Service monitoring to avoid cloud bill shock, but it has not kept pace with Moore’s Law, he argues, citing a recent U.S. Department of Energy (DOE) report (PDF). The report finds, “For example, the cost of a typical compute offering in Amazon has fallen only 18% in the last five years with little or no change in capability. This translates into a compound annual improvement of roughly 4%. Meanwhile, the number of cores available in a typical server has increased by a factor of 6x to 12x over the same period with only modest increases in costs.”

So expecting that type of value proposition is the next logical assumption, right? Wittmann writes, “If you don’t hold your cloud vendors [sic] feet to the fire on pricing, you’re giving up the fundamental advantage that IT has had and exploited for almost four decades.”

I see the value in keeping cloud providers’ feet to the fire, because services tend to be more fuzzy in terms of the math, but Moore’s Law has never translated directly to an actual doubling of productivity in the real business world every two years. And Moore’s Law has its own problem with diminishing returns apparently.

Weigh in below in the comments section: Is Moore’s Law fair to hold up to IaaS providers on pricing? But what of the costs of upgrading and maintaining the hardware in question, or of the IT staff needed to run them? And what do you say of discounting cloudsourcing for users other than the DOE?